Schlotzsky’s today filed
for voluntary Chapter 11 protection in U.S. Bankruptcy Court in San Antonio,
Texas. The company reported liabilities of approximately $71.3 million and
assets of approximately $111.7 million, including approximately $64.8
million of intangible assets, according to the court filing. The company
reported a net loss of $11.7 million in 2003, compared to a net loss of
$199,000 in 2002, and a net loss of $671,000 in the first quarter of 2004.

“Today we have taken an important step toward creating a stronger
Schlotzsky’s,” said Sam Coats, Schlotzsky’s president and chief exec. “It became apparent to our board that this action was necessary to
protect Schlotzsky’s from millions of dollars in claims, judgments, and
debts accumulated during the past few years, while enabling us to
restructure the company. I believe the actions taken by the board took
great courage and are clearly in the best interest of the company.”

According to Coats, the company’s goals going forward are to “make money by
selling the world’s best sandwich, simplify our operation, obtain the
financial resources to grow our franchise system, and make certain that our
valued franchisees get the support, training, and encouragement they are
entitled to receive.”

Over 95 percent of the restaurants in the Schlotzsky’s system are
franchisee-operated. At present there are 471 domestic franchisee-operated
restaurants, 21 international franchisee-operated restaurants, and 21
company-operated restaurants. Coats said that both franchisee-operated
restaurants and company-operated restaurants are expected to continue normal
operations during Schlotzsky’s financial restructuring. “Our customers
should not notice any changes in our products as a result
of today’s court action,” he said. Schlotzsky’s closed 15 unprofitable
company-operated restaurants during the month of July, reducing its
company-operated restaurants by over 40 percent.

The company will request that the bankruptcy court issue a sale order that
would allow Schlotzsky’s to sell nine pieces of real estate to Westdale
Asset Management, Ltd., an affiliate of the company’s largest shareholder,
for approximately $3.4 million. With this sale, the company would have an
additional source of liquidity for its operations over the next few months.

The company’s Form 10-Q for the first quarter of 2004 showed $24.6 million
in contingent liabilities for lease guarantees, mortgage guarantees, and
related party loan guarantees as of March 31, 2004. The company’s Chapter
11 filing also identified several court judgments that exceed $1.2 million
in the aggregate. As of March 31, 2004, the company had $3.9 million in
accounts payable and $5.6 million in accrued liabilities.

“Schlotzsky’s has taken a number of steps during recent months to reduce
expenses, decrease overhead, and improve the company’s cash position,” said
Coats. “Unfortunately, the situation in which we found ourselves made it
impossible to go forward without a formal reorganization. We believe that by
taking this action, we can restructure our financial obligations, obtain new
financial resources, and emerge from this proceeding as a stronger company.”

In addition to the bankruptcy filing, Schlotzsky’s reported that it has
eliminated 15 positions. Four of those eliminated were currently unfilled
positions. Of the remaining 11, approximately half were located in the
corporate headquarters and half were in the field.

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